Fed’s ‘Weak’ Banks, Bernanke Testimony, S&P: Compliance

By Carla Main -
Aug 20, 2013

Five years after one of the most
costly financial crises in U.S. history, the 18 largest banks
still fall short in at least one of five areas critical to risk
management and capital planning, the Federal Reserve said.

While many banking companies have improved capital planning
techniques and raised capital levels, “there is still
considerable room for advancement across a number of
dimensions,” central bank supervisors said in a 41-page paper
released yesterday in Washington outlining weaknesses and
successes in recent stress tests. The Fed didn’t cite any banks
by name.

The Fed staff study shows that, after four such tests, some
of the largest banks still lack comprehensive systems and
policies to model, test, report and plan for economic
calamities. While highlighting strengths and weaknesses, the
central bank said all of the bank holding companies “faced
challenges across one or more” of five areas, and called for
better analysis tailored to each bank’s business and risk.

The Fed conducted its first stress test of the largest
banks in 2009 to promote transparency of bank assets and reveal
how much money they could lose in an adverse economy. Confidence
in banks was low because portfolios were opaque, capital was
scarce and job losses were rising.

Areas where some banking companies “continue to fall short
of leading practice” include not being able to show how risks
were accounted for and using stress scenarios and modeling
techniques that didn’t account for a bank’s particular risks.

Banks this year also were required to submit their own
stress test to the Fed, which supervisors reviewed to ensure the
institutions understood their particular risks and
vulnerabilities.

For more, click here.

Compliance Policy

China to Ease Foreign Investment Rules for New Free-Trade Zones

China plans to suspend some laws on foreign investment in
proposed new free-trade zones including Shanghai as part of
Premier Li Keqiang’s drive to open up the economy to sustain
growth.

The changes will provide “innovative” ways of opening up
the economy, remove unnecessary administration and help
transform the state’s role in the economy, according to a State
Council statement after an Aug. 16 meeting led by Li.

China is boosting efforts to attract foreign companies
after investment from abroad fell last year for the first time
since the global financial crisis. Free-trade zones that will be
allowed to cut bureaucracy and test financial liberalization may
offer incentives that help the government maintain economic
growth of at least 7 percent a year as the export- and
investment-led model of expansion runs out of steam.

Foreign direct investment in China fell 3.7 percent last
year to $111.7 billion from a record $116 billion in 2011,
government data show. Investment rose 4.9 percent in the first
half of this year to $62 billion.

The American Chamber of Commerce in China has urged the
government to open more industries to overseas investors, while
a European Union business group has warned that optimism is
declining and the regulatory environment is worsening.

The State Council will submit a draft document to the
Standing Committee of the National People’s Congress, the
legislature, according to the Aug. 16 statement. If approved,
the State Council will be allowed to suspend some laws on
foreign investment, in the free-trade zone, it said.

While the State Council and Chinese media use the term
“free-trade zone,” the meaning is more akin to a free-market
zone subject to less regulation and interference rather than an
area of duty-free trade.

For more, click here.

Compliance Action

Fannie Mae Joins Freddie Mac Ignoring Write-Off, Report Says

Fannie Mae (FNMA) and Freddie Mac, which have reported record
profits after a taxpayer bailout, are ignoring billions of
dollars in potential losses on overdue loans as they take three
years to adopt a new accounting system, a government auditor
said in a letter made public yesterday.

The accounting change should be made immediately and could
have a material impact on the companies’ finances, according to
the Aug. 5 letter to Federal Housing Finance Agency Acting
Director Edward J. DeMarco from Steve Linick, the regulator’s
inspector general.

The critique may cast doubt on the strength of the recent
rebound reported by the two government-sponsored enterprises.

The FHFA, which oversees Washington-based Fannie Mae and
McLean, Virginia-based Freddie Mac (FMCC), ordered the companies in
April 2012 to start writing off all loans delinquent for at
least 180 days, a standard practice for regulated financial
institutions. The companies previously hadn’t charged off all
loans in that category. FHFA later gave the companies until
January 2015 to comply.

The longer timeline is necessary to accommodate
“considerable changes to systems and operations,” FHFA Deputy
Director Jon Greenlee said in an Aug. 9 letter responding to
Linick.

The companies have mentioned the coming accounting change
in public disclosures filed with the Securities and Exchange
Commission without saying how big any losses might be.

Fannie Mae officials said they were “currently assessing
the impact of implementing these accounting changes on our
future financial results,” in the annual report for 2012 that
the company filed with the SEC.

“This is a topic that we’ve been working on with FHFA for
some time and we’ll continue to work with them going forward,”
said Andy Wilson, a spokesman for Fannie Mae. Brad German, a
spokesman for Freddie Mac, said in an e-mail that his company is
“working on several technological enhancement projects outlined
in the comprehensive implementation plan we sent FHFA back on
Jan. 31, 2013.”

The trial judge in the Court of Federal Claims lawsuit, in
which Greenberg’s closely held Starr International Co. seeks $25
billion from the U.S. for allegedly violating AIG shareholders
constitutional rights, erred by citing the stakes in the case
and Bernanke’s role as an “extraordinary circumstance”
warranting his testimony, the Justice Department said.

“Under the trial court’s reasoning, any person with a
grievance related to any decision in which the Federal Reserve
chairman has personally participated, might equally be entitled
to take his deposition,” the department argued in its filing in
the U.S. Court of Appeals for the Federal Circuit in Washington.

Greenberg claims the assumption of 80 percent of AIG’s
stock by the Federal Reserve Bank of New York in September 2008
was a taking of property that violated shareholders’ rights to
due process and equal protection of the law.

Judge Thomas Wheeler of the U.S. Court of Federal Claims,
who has said he will attend the deposition to provide judicial
oversight, ruled on July 29 that Bernanke would have to testify
in the case. Starr has contended Bernanke’s testimony is
necessary because of his role in the transaction.

The case is Starr International Co. v. U.S., 11-cv-00779,
U.S. Court of Federal Claims (Washington).

S&P to Fight for Evidence U.S. Lawsuit Was Politically Motivated

Standard & Poor’s is trying to show it was unfairly singled
out in a $5 billion fraud lawsuit 18 months after it downgraded
U.S. sovereign debt. Getting the government to provide
supporting evidence will prove difficult.

McGraw Hill Financial Inc. (MHFI) and its S&P unit are seeking
information from the Justice Department about the decision to
target the company in the first federal case against a ratings
firm for grades related to the credit crisis. S&P also wants a
look at the government’s investigative files on other raters as
part of a defense strategy to show it was unfairly sued.

S&P in the coming months will seek to defeat government
attempts to shield internal discussions and evidence as the case
heads for a first round of procedural deadlines that will
determine what evidence eventually goes before the jury.

Having lost a pretrial bid to get the case dismissed in
federal court in Santa Ana, California, S&P now must prepare a
defense that will persuade a jury to reject allegations that it
defrauded investors by falsely claiming its ratings were
independent and free of conflicts of interest.

U.S. Attorney General Eric Holder said Feb. 5, the day
after the complaint was filed against S&P, that it was unrelated
to the downgrade.

S&P lawyer John Keker, of San Francisco-based Keker & Van
Nest LLP, said at a hearing that the company’s legal team will
eventually seek to question a number of high-level officials at
the Justice Department as well as at the U.S. Treasury and the
Securities and Exchange Commission.

S&P has said nothing in court filings drawing a link
between the lawsuit against it and its August 2011 decision to
downgrade the U.S.’s 60-year-running AAA credit rating to AA+
with a negative outlook.

U.S. District Judge David Carter set a Dec. 16 hearing to
determine how much additional time both sides need for
discovery. The government has proposed a trial start date of
Feb. 17, 2015.

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S.
District Court, Central District of California (Santa Ana).